Housing Starts Rise … To 1991 Levels (Industrial Production Beats Expectations)

First, the less-than-good news — housing starts rose by 2.8% in March, but far below the expectations of 7.0% by industry analysts.


Housing starts rose to … 1991 levels and every other trough in housing starts since 1959.


Yet homebuilding company stocks spiked on the announcement.


Now for the good news! On the macro front, industrial production rose 0.7%, more than the expectation of 0.5%. And capacity utilization rose to 78.7%, the highest level since the end of The Great Recession. Still, it is short of the 80% barrier that was seen during the Clinton and GW Bush years.


Although the US economy is still below 80% capacity utilization, we are seeing progress. Housing starts have been rising since they hit bottom in April 2009.

Mortgage Purchase Apps Rise, But Still 16% Lower Than Last Year

We know that the major banks like Wells Fargo, Bank of America and Citi have experienced a dramatic decline in mortgage originations.


Here is why!

According to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 11, 2014, mortgage applications increased 4.3 percent from one week earlier.


The Purchase Index increased 2.20% (NSA) from one week earlier. However, purchase applications remain 16% lower than this time last year.


If we look at Seasonally Adjusted Purchase Applications, we see that purchase applications and real median household income are back to 1995 levels, but with lower employment-to-population ratio and M2 Money Velocity. In other words, fewer qualified borrowers.


The Refinance Index increased 7 percent from the previous week while the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.47 percent from 4.56 percent, with points decreasing to 0.32 from 0.33 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.


Refinancing applications remain low after the May Day rise in Treasury and mortgage rates (orange box).

Face it, the single family residential mortgage market is tired.


Manufacturing Jobs Down 1.67 MILLION Since Beginning Of Recession (Part-time Employment UP 60.5%)

America has never recovered from The Great Recession, particularly if you were in the manufacturing sector. The U.S. is down 1.67 MILLION manufacturing jobs since the beginning of The Great Recession in Q1 2008.


Similarly, part-time employment for economic reasons rose 60.5% from the beginning of the recession to today. So, it is no great surprise that real median household income and real hourly earnings for Americans has slumped making it more difficult to qualify for a residential mortgage.


NOW FOR THE BAD NEWS! According to the Heritage Foundation, our tax code and entitlement system has created a “low reward” zone for low-income workers (often service and part-time employees).


Black Swan? Coincidental Lagging Index Falls to 88.6 (Like Everything Else)

The Conference Board’s Coincidental Lagging Index was released yesterday and it fell to 88.6 for February. Strangely, the S&P 500 index keeps rising as the coincidental lagging index keeps falling.


If we examine economic indicators from 1997-1999 (real median household income, M2 Money Velocity and Labor Force Participation Rate), we can see the decline in ALL variables since 1997-1999.


But at least investors are happy since the equities markets keep sailing along.


The infamous Hindenburg Omen is not flashing, but there still seems to be a large disconnect in the market.


I hope this doesn’t mean a Black Swan event is imminent!


Wells Fargo profit beats estimates, helped by one-time gains (Despite Mortgage Originations Being Down)

According to an excellent article in Reuters, Wells Fargo profit beat estimates, helped by one-time gains.

Of particular note in the article is:

The bank, the most profitable in the United States in 2013, has been hurt in recent quarters by declining demand for mortgage refinancing, as lending rates have risen.

Income from mortgage banking fell by 46 percent to $1.5 billion from the same quarter last year. Wells Fargo’s new home loans fell by two-thirds to $36 billion in the quarter from $109 billion a year earlier, the lowest since the third quarter of 2008, when the housing market was under heavy stress.

But a series of one-time items this quarter helped offset much of the decline in the mortgage business. Wells Fargo recorded $847 million in gains on its equity investments, about 7.5 times the $113 million it earned a year earlier.


You can see why Wells Fargo is suffering a loss in income from their mortgage banking operations. Mortgage purchase applications are flat-lined along with real median household income. But the S&P500 has been a saving grace. Along with The Federal Reserve.


U.S. Dollar Has Been Declining Since 2001 Along With The U.S. Economy – Food Prices Up, Purchasing Power Down

As I discussed yesterday, the US has been in a recession since 1997-1999, at least in terms of real median household income, M2 money velocity and labor force participation.


It turns out the U.S. dollar has been declining since 2001 while the economy has been in a prolonged recession.


Of course, the CRB Foodstuffs Index is going the opposite direction of real median household income. Reduced consumer purchasing power, rising food prices and a stagnant recovery are not good news for the average American.


“Say, can I buy a pound of Wagyu beef? Will this cover it?”




Confidence Among U.S. Homebuilders Increases To 2006 Levels (Fed Helps)

Homebuilders are surprisingly confident given the lower real wage growth and real median household income since the housing bubble burst. The Fed’s zero-interest rate policy seems to be helping homebuilders, not the average citizen.

April 15 (Bloomberg) — Confidence among U.S. homebuilders rose less than forecast in April as sales and prospective buyer traffic stagnated, showing the residential real estate market struggled to improve after a harsh winter.

The National Association of Home Builders/Wells Fargo builder sentiment gauge climbed to 47 this month from a revised 46 in March that was weaker than initially reported, figures from the Washington-based group showed today. Readings greater than 50 mean more respondents report good market conditions. The median forecast in a Bloomberg survey called for 49.

Tight credit for some home buyers and limited availability of lots are restraining builder sentiment months after snow storms and freezing temperatures held back construction. At the same time, historically low mortgage rates and hiring gains helped drive an increase in the outlook for sales, the report showed.

Tight credit? Actually, there is plenty of credit if the borrower has sufficient income and assets as well as a good credit score.


Ah, could it be that The Fed’s Quantitative Easing is swelling homebuilder expectations? Hiring gains are going to have to be at higher wages than this economy is seeing.


Face it. The US economy hits its peak in 1997-1999 can has been asset bubbles ever since rather than wage and salary growth.


Surprise! April New York Fed Empire Report Falls to 1.29, Est. 8

Well, the weather outside is delightful, but the Empire Report is spiteful. Despite the return of beautiful Spring weather in the New York area, the Empire Manufacturing index fell to 1.2. And the employee workweek printed at only 2.04.

April 15 (Bloomberg) — Forecast range 3.5 to 10 from 51 estimates
• General business conditions were 5.61 in the prior month, according to the New York Fed
• Prices paid rose to 22.45 vs 21 last month
• New orders fell to -2.77 vs 3.13 last month
• Number of employees rose to 8.16 vs 5.88 last month
• Work hours fell to 2.04 vs 4.71 last month
• Inventory fell to -3.06 vs 7 last month
• Six-month general business conditions rose to 38.23 vs 33.21 last month


Some economic recovery. Note that the levels since the end of the recession in June 2009 are lower than the 2003-2007 period.

Why The Consumer Financial Protection Bureau Is Ineffective At Controlling Mortgage Risk

The much heralded Consumer Financial Protection Bureau (CFPB), of which Elizabeth Warren (D-MA) was the architect, is largely ineffective. Why?

1. Elizabeth Warren and Richard Cordray misunderstood the problem facing mortgage borrowers and lenders.

Essentially, the world that Warren and Cordray wish that existed (1999) when real median household income was at its max and mortgage foreclosures were just above 1% doesn’t exist anymore. The tidal wave of mortgage foreclosures wiped out AT LEAST 5% of mortgage borrowers from the pool of eligible borrowers (or nearly 10% for serious delinquencies). But the decline in real median household income means that millions of borrowers cannot meet the income test for borrowing.


If we add other confounding economic variables that have deteriorated after 1999 (such as M2 Velocity and Employment-to-population ratio) to the mix, one can see why it is so difficult to jumpstart mortgage purchase applications REGARDLESS OF CFPB RULES. And despite the zero interest rate policies (ZIRP) by The Fed.


In fact, the remaining borrower pool is fewer in numbers and weak compared to 1999 that lenders struggle to find borrowers even if they expand their credit box (loosen underwriting standards). And CFPB will be forced to relax or undo their promised ironclad rules for safety.

2. The alleged iron-clad QM rules have more leaks than The Titanic.

The Consumer Financial Protection Bureau recently issued the Qualified Mortgage (QM) rules. Originally, QM status required the meeting of strict underwriting standards, including a 20 percent down payment and a 28 percent housing-cost-to-income ratio. Those provisions are no longer in place. A loan can obtain QM status without that down payment, and the debt-to-income ratio was raised to 43 percent. In addition, the QM rules allow for so many exemptions from the standards that the standards are virtually worthless.

So, the Consumer Financial Protection Bureau is almost irrelevant thanks to their misunderstanding of mortgage risk and where the economy sits today. Not to mention that their ironclad rules are as porous as The Titanic.

In other words, Adam Smith’s invisible foot has taken over and made the CFPB irrelevant.

But remember, we got into this mess in the first place thanks, in part, to the Clinton Administration’s “National Homeownership Strategy: Blueprint for the American Dream.” Read it and weep. nhsdream2


Retail Sales Surprise Driven By Auto Sales (But Still 16% Below 1999 Levels)

February retail sales rose 1.1% MoM, surprising analysts.


Auto sales rose 2.5% in February after a downturn in January.


Before you pop the champagne like the stock market did this morning, bear in mind that domestic auto sales remain 16% below the levels from 1999, before the U.S. economy started to run out of gas.


Real median household income peaked in 1999 and has not been recovering. So, let’s see how far auto sales can rise “running on empty.” OR is it the sign that the economy is catching fire at last?


Paul Krugman Suggested Fed Create A Housing Bubble In 2002 (After The Horse Was Out Of The Barn)

Yesterday, I wrote about America’s 18 year recession that started in 1997-1999. Nobel Laureate Paul Krugman wrote the growth in housing finance didn’t start until President George W. Bush took office in 2001. Of course, that was pure poppycock.

The surge in housing finance began back in 1995 with President Clinton’s and then HUD Secretary Andrew Cuomo’s “National Homeownership Strategy: Partners in the American Dream.” This strategy created a partnership between mortgage lenders, homebuilders, FHA and Fannie Mae/Freddie Mac for the purpose of increasing home loans, streamlining mortgage lending (removing barriers) and reaching out to under-served borrowers.

From 1995-2000, mortgage lending for 1-4 units structures grew by an astonishing 55%. Over this same time period, real median household income rose by 5.26%.


The problem came in 1999 when real median household income reached its peak and then started to decline. The dot.com bubble started to deflate and by 2002 had bottomed out. THAT is when Paul Krugman called for The Federal Reserve to create a housing bubble to replace the deflated dot.com bubble.

Sure enough, the U.S. now got 2 bubbles for the price of one: a housing bubble and a reflated S&P 500 index after 2002!


But the problem with Krugman’s logic is that house prices were already rising rapidly and after 2002, the economy added another 121% in mortgage loans (1-4 unit). After 2002, real median household income rose by 2.7% to its peak in 2007. Then KABOOM!


But as I said yesterday, M2 Money Velocity peaked in 1997 and real median household income peaked in 1999. It has been all down hill since then with the exception of a rally from 2004-2007.

So, the esteemed Paul Krugman failed to realize that mortgage lending and home prices were already on rise prior to 2002. Recommending The Fed to create a housing bubble was really asking The Fed to throw gas on the fire.

Here we sit in 2014 with millions fewer eligible mortgage borrowers because of the unemployment surge and housing bubble burst. Credit bubbles are extremely dangerous.


America’s 18 Year Recession That Started in 1997 (It Didn’t End In June 2009)

The U.S. economy has been in a recession since 1997. While I am not referring to the NBER’s definition of a recession (that allegedly ended in June 2009), I am talking about declining real incomes, labor force participation and M2 Money Velocity. Both labor force participation and M2 Money Velocity peaked in 1997 while real median household income peaked in 1999. And all three have been declining ever since.


And to add another slap in the face to consumers, the purchasing power for consumers has been deteriorating ever since the creation of The Federal Reserve System in 1913.


Once the 16 year recession started in 1997-1999, our economy has replaced economic growth with a series of asset bubbles like the Dot.com bubble, the housing bubble and The Fed bubble.


As labor force participation and M2 Money Velocity peaked in 1997, we saw the dot.com bubble form … and burst. We then saw the peaking of real median household income in 1999. It has been bubbles ever since.


Mortgage purchase applications soared AFTER the recession in Money Velocity, real income and labor force participation. Now purchase applications are back to mid 1990s levels.


To be sure, the 18 year recession has ended for investors, but not for the middle and lower classes.


So, the recession for the middle and lower classes did not end in June 2009 as the NBER claims. It has been ongoing since 1997 when labor force participation and money velocity peaked and real median household income peaked in 1999. It has been nothing but asset bubbles ever since.

Q1 2014 Real GDP Growth Forecast Plunges To 1.6% (But Q2 Forecast Skyrockets To 3.0%)

Economists have downgraded their forecast for Q1 2014 Real GDP growth in the USA to 1.6%.


But Q2 2014 real GDP growth skyrocket to 3.0%! Hot fun in the Spring/Summer time!

The way you hear it, the east coast and midwest experienced “The Day After Tomorrow” type weather. While the west coast and southwest were warm.

But before you get too excited about the prospect of 3% Q2 2014 real GDP growth, bear in mind that real median household income growth is often 2-3% lower than real GDP growth since 2000. The average spread is 2.6% since 2000.


In any case, if 3% real GDP growth materializes AND real wages/income increase, we may see a middle class housing recovery again.


Income Inequality and Federal Debt Expansion (Gov’t Makes Inequality WORSE)

It has been almost 50 years since President Lyndon B. Johnson (LBJ) signed into law Medicare and led the charge on the “War on Poverty.” However, despite LBJ’s “Great Society” programs, income inequality in the U.S. just keeps growing and growing and growing and …

Here is a chart of the GINI ratio (a measure of income inequality) since 1967, plotted against U.S. public debt to fund the Federal government. Notice that income inequality keeps getting worse and worse every time the Federal government tries to make it better and better.


In this chart, I add CoreLogic’s home price index to capture the myriad of “affordable” housing programs that helped create a housing bubble (which collapsed) and real median household income. Following the housing bubble burst, we now have sinking real income as well.

Since December 31, 2006, The Federal debt has ballooned by $9 trillion, the GINI ratio has risen, and real median household income has declined. Personal transfer payments (Social Security, Medicare, Food Stamps, etc) have increased by 51%.


And consumer purchasing power keeps falling.


Suffice it to say, the more government promises and spends, the worse income inequality gets. Particularly, when full-time jobs are replaced by part-time jobs and food stamps.

LBJ’s campaign button should have read “All the way … to insolvency.”

lbj campaign button

And here is Hillary Clinton’s Presidential Campaign ad from 2008 where she promises MORE free things to voters (which is make income inequality worse).

Of course, government cronies make out like bandits when the government spends.



Stymied! 24% of Agency Loans Had DTIs Greater Than 43% — And Mortgage Originations Still Stink

The Consumer Financial Protection Bureau (CFPB) has declared that the debt-to-income (DTI) on a Qualifying Mortgage (QM) must be 43% or less.

But according to Inside the CFPB, “A Quarter of New Purchase Mortgages Exceed QM DTI Ratio.

Nearly a quarter (24 percent) of all purchase loans funded by Fannie Mae and Freddie Mac have a debt-to-income ratio greater than the qualified mortgage limit of 43 percent, according to the February 2014 National Mortgage Risk Index released by the conservative American Enterprise Institute’s International Center on Housing Risk. Researchers found no discernible impact on the purchase loan market from the CFPB’s QM regulation.

In February, half of agency loans had a down payment of 5 percent or less, nearly one-in-four agency loans had a DTI ratio greater than 43 percent, and one-in-eight agency loans had a FICO score of less than 660,” the AEI said.

If DTI >43%, then it is Fannie, Freddie, FHA, and Rural Housing Loans (all home purchase only). It is 16% for Fannie and Freddie only, 45% for FHA (all home purchase Only)! The maximum DTI for FHA is 43%, with exceptions allowed. (THAT is a lot of exceptions!).

Now, isn’t that special! Agency loans exceed CFPB DTI standards. But it may not matter since MORTGAGE BORROWERS ARE BURNED OUT due to declining real income after the foreclosure crisis and housing bubble burst.


And it terms of residential mortgages outstanding, we see that it is declining with real median household income, despite the fervent efforts of the Federal Reserve to keep mortgage rates low.


Here is the MBA’s Purchase Application index. Same story.


Even with agencies exceeding CFPB limits on DTI, mortgage originations have crashed and burned.


Die Another Day: Dow Down 100 Points On JPMorgan Crash In Mortgage Revenue

Yesterday was a disaster for the stock market, but I was told on CNBC Squawk Box that there is no correction going on.

Maybe not, but the Dow is down 100 points today (as of 1:48 pm EST). The Nikkei is down 2.38% and Europe is down over 1%.


Today’s decline was led by JPMorgan. Earnings slumped in every major division at JPMorgan, the first of the top U.S. banks to post results for the period, amid a 42 percent drop in mortgage revenue and a 21 percent slide in fixed-income trading.


This was not surprising to Logan Mohtashami, Chris Whalen or myself. Stagnant real income and flat-lined mortgage purchase applications will do that to a lender.


Yes, it is hard to create a mortgage recovery, even with The Fed’s massive assistance, when household incomes have dropped to a new stagnant level. Here is the Dow Jones Industrial Average and Los Angeles house prices (rising) against stagnant income growth.


Here is a picture of JPMorgan’s mortgage group after fighting the downturn in household income.


Perhaps one of the three witches from Shakespeare’s “MacBeth” can create an increase in mortgage lending despite a sick underlying economy.


A Tale Of Two Cities (In Minneapolis) – Redlining By Lenders? Or Clustering Of Low Income Households?

The University of Minnesota Law School’s Institute on Metropolitan Opportunity has released a study entitled “Twin Cities in Crisis: Unequal Treatment of Communities of Color in Mortgage Lending” In this paper, it alleges that lenders engaged in redlining. The term “redlining” refers to the practice of marking a red line on a map to delineate the area where banks would not invest (or lend).

The Institute produced maps of subprime lending and race during 2004-2006, nearing the peak of the housing bubble. Note that the highest concentrations of subprime lending (not very clearly defined by the authors) runs along a southeast to northwest path.


However, median income by census tract also follow a southwest to northwest path.


If I look at house prices of $100,000 and under, we see the same southwest to northwest line.


The higher subprime and minority concentration areas are correlated with lower median income and house prices.

So, without including additional control variables (like borrower income, credit score, house prices, etc.), this study is useless in determining whether redlining occurred.

Identification of low income and house price neighborhoods, perhaps.

Jobs Recovery? Family Dollar Stores Joins The Ranks Of Retail Shutdowns (Evaporating Middle Class)

Family Dollar Stores is joining the ranks of the 17 retail chains that are shutting down stores and shedding jobs.

April 10 (Bloomberg) — Family Dollar Stores Inc., facing an increase in retail competition, is closing about 370 stores and conducting a review to improve its business.

The closings, about 4.6 percent of the company’s 8,100 locations, will generate as much as $45 million in annual cost savings beginning in the fiscal third quarter, the Matthews, North Carolina-based company said today in a statement. The review includes cutting an unspecified number of jobs, lowering prices on about 1,000 items and slowing new store growth.

Certainly, one can blame an increase in retail competition. But how assigning some blame to decline in earnings since 2007 that shrivels consumer demand?


Family Dollar Ribbon Cutting

The Yellenburg Omen? NASDAQ Declines 3.10%, Dollar Spot At 5 Month Low

April 10 (Bloomberg) — U.S. stocks fell, with the Nasdaq Composite Index sinking the most since 2011, as technology shares resumed a sell-off on concern valuations are too high as earnings season begins. Treasury rates sank to a three-week low on speculation interest-rate increases won’t be accelerated.

The Nasdaq Composite Index sank 3.1 percent at 4 p.m. in New York to a two-month low that erased its gain this year. The Standard & Poor’s 500 Index lost 2.1 percent to the lowest since Feb. 19.


The 10-year Treasury note fell five basis points to 2.64 percent.


The Bloomberg Dollar Spot Index declined to a five-month low and the yen strengthened on a surprise drop in China’s trade figures. Gold jumped 1 percent to $1,318.30.


Investors returned today to selling the biggest winners in the five-year U.S. bull market, with Internet and biotechnology shares plunging. Bed Bath & Beyond Inc. tumbled the most in three months after warning first-quarter profit will fall short of analysts’ estimates. China’s exports slid 6.6 percent and imports declined in March, adding to concern that expansion in the world’s second-largest economy will deteriorate further.

The Hindenburg Omen (aka, the Yellenburg Omen) isn’t flashing red.


And the NASDAQ Composite index is below the Ichimoku trend lines.


Well, the wheels have come off of middle class income.



Four Years Later, Post Crisis Late-Pays On Mortgages Near Zero (Tight Credit, Fewer Qualified Borrowers)

According to Fitch, late-pays on mortgages with vintages of 2010 and later remain at near zero.

April 10 (Bloomberg) -By Jody Shenn and Christopher DeReza- Delinquency rates on recently issued U.S. RMBS remain near zero nearly 4Y after the first post-crisis transaction was completed, Fitch said in statement.
• Of ~20,000 loans securitized since the start of 2010, two loans are currently over 60 days delinquent
• When including loans only one payment behind, total delinquency as percentage of remaining loans is only 18bps
• Reflects “unusually high” credit quality, tight loan underwriting of the mortgage pools: Fitch MD Grant Bailey
• Volatile prepayment behavior “distinguishing characteristic” of recent transactions
• After spiking to annualized prepayment rates above 60% in 2012, most are currently prepaying at rates below 10%

Of course, <a href="“>credit standards tightened dramatically after the big homeownership push during the last decade, such as requiring credit (FICO) scores of 750 and above. Some lenders have been easing credit requirements during the last year, however.

Then there is the decline in qualified borrowers who have been decimated after the housing bubble burst. There is 1) the decline in real median household income since 2007, 2) the surge in foreclosures resulting in low (and unacceptable credit scores), 3) growth in households on unemployment, food stamps, etc., resulting in lower household incomes.

So, even though foreclosure filings have dropped considerably 2009, many who were foreclosed upon (or lost employment) are no longer in the eligible pool. Thus, only the cream is left in the eligble buyer pool. And a thin layer of cream it is too.